Apple has negotiated generous subsidies from mobile carriers to sell iPhones at lower upfront prices, but Google and its Android licensees haven't, leaving carriers such as Verizon to drive up the price of higher end Android phones to make up the difference.

The result is a price disparity that favors the various iPhone models by $100 to $200 over Android devices with a similar hardware cost. That's helping Apple keep its margins up even in a market glutted with competition from scores of Android models from various makers.

It also leaves carriers and other hardware makers fighting over the scraps of profit left, as most Android buyers aim toward cheap, low end models. Carriers like Verizon know that buyers interested in high end Android phones will pay virtually anything, so they're marking those models up to be half again as much as Apple's new iPhone 4S.

Android costs more, not less

When Google first began touting Android as an open source platform, pundits predicted that the wide variety of Android licensees would offer cheaper phones with differentiated, innovative features that Apple simply couldn't compete with. Instead, Apple has consistently offered more attractive hardware at the same or lower prices, in part by negotiating higher subsidies in exchange for access to the iPhone.

For years, Apple has set a standard entry price of its newest smartphones at $199, with higher end models available with more storage. This year however, Verizon has set a new contract price for its high end Android phones at $299.

Both the Motorola Droid RAZR and the just released Google-branded Samsung Galaxy Nexus are $299 with a two year Verizon contract, and both are listed as costing $649 without a contract. In contrast, Apple's 16GB iPhone 4S is offered for only $199, even though it costs the same $649 without a contact. Apple is getting a $450 subsidy, compared to just $350 for Android licensees Motorola and Samsung.

Apple's $450 subsidy remains the same across the iPhone 4S range of 32 and 64GB models. The 8GB, $99 Verizon iPhone 4 has a full retail price of $549, also giving it the same $450 subsidy.

This has the effect of making the base model iPhones appear cheaper, and the higher end iPhones with increased storage appear to be about the same price as the base model, high end Android offerings.

Higher priced, lower end Android models

Verizon's $199 Android phones, including the Samsung Droid Charge, Motorola Droid 3 and Droid Bionic, cost $499, $459 and $589 respectively without a contract, making their subsidies worth just $300 to $390, or $150 to $60 lower than Apple's.

The closest Verizon's phones currently come to an iPhone subsidy appears to be the HTC Thunderbolt, which is being offered for $149, a $420 subsidy compared to its $569 full retail price. However, this involves a special promotional discount of $100, making the "sale" price of Android models still higher than regular price of any of Verizon's iPhones.

Discounted older Android models, such as the $79 Samsung Illusion, $99 Samsung Stratosphere and $149 HTC Droid Incredible 2 are listed with a full retail price of $329, $409 and $439 respectively, giving them a subsidy of between $250 and $310, or $140 to $200 less than Apple's "low end" 8GB iPhone 4, despite their being roughly six to nine months newer than than the original iPhone 4 (albeit saddled with a 2.3 version of Android that is now a year old and lacking upgrade potential; the iPhone 4 runs Apple's latest iOS 5).

Android is subsidizing Apple subsidies at Verizon

In 2010, the "year of Android" at Verizon, the carrier bet on Android as an alternative to Apple's iPhone. Toward the end of the year, it found that it could not attract and retain subscribers as well as AT&T could with the iPhone, and subsequently agreed to carry Apple's iPhone 4. In order to gain access to the iPhone, Verizon had to pay Apple a premium in subsidies.

Rather than pitting cheaper Android models against the iPhone, Verizon has marketed both in parallel; it simply charges more for Android, apparently in an effort to make up for the short term expense of iPhone subsidies.

Additionally, unlike new iPhone models that appear every year, Android licensees pop out new models every three to six months. This has created an upgrade cycle that forces down prices, something that is not in carrier's interests. Because high end Android buyers seem to be price insensitive, Verizon can charge them significantly more to get the latest model at the $299 tier, then trickle down updates to the once standard $199 tier, rather than glutting their offerings with a large number of hard to differentiate models all priced below $100.

The end result is that Apple has an attractive enough product to demand a higher subsidy from Verizon and other carriers, starting the iPhone 4 and 4S at $99 and $199, a significant discount buyers will recognize, unless the are set on buying the latest Android phone to appear on the market. The lower subsidies that Verizon can get away with offering to Android buyers essentially helps it to offer iPhones for less.

Somewhat ironically, this means that Google's Android is assisting Apple's hardware business in a way that's similar to how Microsoft makes more money licensing its IP to Android makers rather than selling its own Windows Phone 7 platform to them, or in the respect that some Verizon Android phones are shipping with Microsoft Bing as their default search service rather than Google's own.

While Android is consistently being positioned as a threat to Apple in comparison to Microsoft's Windows from the 1990s, Google's efforts to push Android are actually funneling an additional $100 or more from each devoted Android consumer to ensure that carriers such as Verizon can offer iPhones for less by paying Apple a significantly higher upfront subsidy per phone. Microsoft Windows never similarly benefited Apple's Macintosh platform.

Here's your first troll.... what you get for 199 is a 2 year old iPhone. Hows that for a troll start.

What you get for $199 is a 16GB iPhone 4S, which I'll happily take over any phone on the market today. What you get for $99 is an iPhone 4, which by any standard is still a fantastic phone. If you're suggesting (trolling?) that the $199 buys you an iPhone 4S, which some suggest is 'just the iPhone 4' because its name didn't change or because it wasn't redesigned on the exterior, I'd suggest that such a statement, if a label is to be ascribed to it, is simply 'shallow'. Apple (pretty much any company, really) shouldn't redesign their products simply for the sake of redesigning them. They should only gradually improve on that design.

Quote:

Originally Posted by MacBook Pro

"While Android is consistently being positioned as a threat to Apple in comparison to Microsoft's Windows from the 1990s..."

I disagree with these comparisons. While Microsoft may have participated in some dubious practices their business model wasn't blatantly illegal, immoral or unethical.

What does that have to do with the quoted statement, though?

And some of Microsoft's business practices were truly illegal. At least the courts decided that was the case.

The true measure of a man is how he treats someone that can do him absolutely no good. Samuel Johnson

What you get for $199 is a 16GB iPhone 4S, which I'll happily take over any phone on the market today. What you get for $99 is an iPhone 4, which by any standard is still a fantastic phone. If you're suggesting (trolling?) that the $199 buys you an iPhone 4S, which some suggest is 'just the iPhone 4' because its name didn't change or because it wasn't redesigned on the exterior, I'd suggest that such a statement, if a label is to be ascribed to it, is simply 'shallow'. Apple (pretty much any company, really) shouldn't redesign their products simply for the sake of redesigning them. They should only gradually improve on that design.

Add to the fact that several are '4G' which means you'll use more data while draining your battery faster and you end up with having to buy ore data and additional battery packs. Unfortunately for Android users less and less models are coming with SD card slots, HW QWERTY keyboards, though most still have removable batteries but that seems to be fading away, too, as OEMS wanting to use Android find the only way to compete is to mimic the iPhone in every way except screen size, which is really just a nice marketing ploy for being able to have less refined components between the same display with an equivalent thickness.

We have Apple actually making a decent profit and being able to invest in good on-boad NAND, RAM, and interconnects that make their devices that much better than the competition. I wonder how fast those 16GB microSD cards are that they suppling run? Are they Category 2 or are they paying extra for Category 4 or 6?

And so far we have one smartphone being sold with ICS after more than year long wait for any real update. When will these others phones get ICS? Has Verizon or the vendor made any promises that included an exact date?

I don't know, seems like a lot of money to spend when you can get more and better HW for less percentage of the retail cost with a solid track record of frequent and consistent updates… But that's just me.

This bot has been removed from circulation due to a malfunctioning morality chip.

Am I the only one that says "no crap" when I read this? Apple forces the carrier's to sell at the price points that they do. Apple is very smart in how they want their phones marketed and maintain total control of it. Do you not believe that if AT$T could sell the iPhone for $299 - $399 it would? The iPhone sells itself and people would pay it whatever is asked, except Apple will not let them and maintains the price right where they want it. They will sell the Android phones for what they can get for them. As long as people are paying they will sell them, then when sales drop off, the price will drop with them. This has nothing to do about "making up" the differnce. This is about selling an item for what they can get for it. I love sensationalism.

This is an absurd logical fallacy. There is no direct connection or "subsidy" relationship between the prices of Android and iOS phones.
It is like saying the price of a can of soup at the market directly subsidizes the discount on a loaf of bread, ignoring the thousands of other products being sold a various price and profit points. Let's not forget that the big cash flows for Verizon have nothing to do with a measly $100 discount on a bi-yearly purchase.

I just ordered two Galaxy Nexus Phones. (Upgrading two original droids) Of course I used my new every two plus a hundred dollar rebate on each phone.... Verizon does kind of stick it to the Android users ( unless you know where to get the rebate promotion codes ) It seems like 1/2 ( about 15) of the people in my office are ordering them. It won't have iPhone sales numbers, but this looks like it will be a good seller for Samsung...

I like the iPhone, but wanted 4G and love the larger screen (old eyes)......

That is all Apple seems to talk about. The number one reason Apple hates Android so much. No matter what Apple does, Android keeps pulling away. I give it 5 years and the iPhone will be the Mac, very niche very little market share. Android will be everywhere and Google will be laughing.

I'm a big iPhone fan and everything, but the conclusion of this article is just incorrect.

High end Android buyers are willing to spend more money and wants to be able to upgrade as soon as it can, so the fact Verizon is providing a lower subsidy and higher price, let its users to upgrade sooner rather than later.

That is all Apple seems to talk about. The number one reason Apple hates Android so much. No matter what Apple does, Android keeps pulling away. I give it 5 years and the iPhone will be the Mac, very niche very little market share. Android will be everywhere and Google will be laughing.

Emoticon limit. Just pretend these continue until the post CHARACTER limit.

I'm a big iPhone fan and everything, but the conclusion of this article is just incorrect.

High end Android buyers are willing to spend more money and wants to be able to upgrade as soon as it can, so the fact Verizon is providing a lower subsidy and higher price, let its users to upgrade sooner rather than later.

I don't see that has anything to do with Apple at all.

It doesnt because Apple fixes its prices. Carriers CAN NOT sell the iPhone for anything different then what Apple allows it. Android on the other hand does not make these demands therefore the carriers are free to sell for whatever they can get. And right now they are getting paid. Android must be doing something right if people are willing to pay these obviouly high prices??

I don't understand what this article is trying to convey. It costs Verizon more to sell an iPhone and an Android? The 32GB iPhone and Galaxy Nexus are the same price. And, if Verizon has to subsidize the iPhone more than others, isn't that a bad thing for consumers? Verizon has to make up that money somehow which means higher monthly service prices. Wouldn't you rather pay a little more up front to save on your month service for the next 2 years (if that was an option, obviously)? Not everyone wants an iPhonelet them choose what they want. Some people like the clean cut iPhone, others like the hard edge Android. It's a matter of choicepresent the options and let consumers choose. It's as if convincing people to buy iPhone's is for the greater good of society. Seems that websites like this keep the Android vs. iPhone saga goingreminds me of Nintendo vs. Sega. Ah, the good ol' days. When we didn't have to worry about smartphones.

(Sent from my Mac so don't chew me out for being some Android hugger).

That is all Apple seems to talk about. The number one reason Apple hates Android so much. No matter what Apple does, Android keeps pulling away. I give it 5 years and the iPhone will be the Mac, very niche very little market share. Android will be everywhere and Google will be laughing.

And Apple will sell 90%+ of all the high-end phones and garner the Lion's share of all the profits, while leading the way with almost ALL the innovation in the marketplace.

That is all Apple seems to talk about. The number one reason Apple hates Android so much. No matter what Apple does, Android keeps pulling away. I give it 5 years and the iPhone will be the Mac, very niche very little market share. Android will be everywhere and Google will be laughing.

You need to reevaluate your definition of niche.

This bot has been removed from circulation due to a malfunctioning morality chip.

And Apple will sell 90%+ of all the high-end phones and garner the Lion's share of all the profits, while leading the way with almost ALL the innovation in the marketplace.

Yep, terrible result for Apple and it's customers.

Innovation, sure 3 years ago. iPhone has not changed much since its debut. 3.5 inch screen, same general boring shape, same genral boring everything. Way to innovate. As Apple sits by, Samsung and HTC continue to push the smart phone to greater heights which is evident by A - People willing to spend more money (as this article shows) and B - the growing gap in market share Android continues to create with all other smartphone OS's.

As for profit, cannot argue there, Apple knows its robots will purchase pretty much whatever they produce no matter the cost. Apple is brilliant in this regard, its profits do not benefit the customer one bit.

"There you go again (with apologies to Ronny R)". What's with the facts already? - don't confuse the troll with facts. If we are accused of sticking our fingers in our ears, maybe he is just covering his eyes when he sees a chart like this (you know, Monkey see, monkey do, etc - with apologies to our simian friends).

What's the 28% "other", apart from being the largest category in your limited study?

btw "550,000 activations a day" aren't happening in the US, which is where the study you linked to is based.

Android makers seem to have reverted to the old rules, once used so effectively by Nokia.

1. Release new model and charge a premium to hyped up early adopters.

2. Wait a month or so then drop prices for the bread and butter.

3 Six months or so dump the excess.

4. repeat with next big thing, e.g. Galaxy 3

The difference though is that Nokia really did not have much compitition when it used this strategy. Android has massive compition and yet still sells phones at crazy prices. They must be doing something right.

"There you go again (with apologies to tricky dick)". What with the facts already - don't confuse the troll with facts. If we are accused of sticking our fingers in our ears, maybe he is just covering his eyes when he sees a chart like this (you know, Monkey see, monkey do, etc - with apologies to our simian friends).

What I see is Android having 44% of the market. That is one fact I see. I also predicted that in 5 YEARS iPhone would be niche, how does your 2011, fact driven chart have anything to do with that statement? Oh it doesnt. Lets see what that chart looks like this time next year??? Because a year ago that chart would have had Android at around 25%, so in 1 year it nearly doubled.

Innovation, sure 3 years ago. iPhone has not changed much since its debut. 3.5 inch screen, same general boring shape, same genral boring everything. Way to innovate. As Apple sits by, Samsung and HTC continue to push the smart phone to greater heights which is evident by A - People willing to spend more money (as this article shows) and B - the growing gap in market share Android continues to create with all other smartphone OS's.

As for profit, cannot argue there, Apple knows its robots will purchase pretty much whatever they produce no matter the cost. Apple is brilliant in this regard, its profits do not benefit the customer one bit.

Judging by the language you use and due to the myths you are attempting to perpetuate, I have a question.

How much are you being paid to write that crap?

Better than my Bose, better than my Skullcandy's, listening to Mozart through my LeBron James limited edition PowerBeats by Dre is almost as good as my Sennheisers.